Sticking to its cautious stance, Bangladesh Bank has cut private sector credit growth target, kept policy rates unchanged, created fund for promoting manufacturers and exporters, and planned to increase broad money supply.
In its half-yearly monetary policy statement unveiled yesterday, the central bank said: “This is a cautious but explicitly pro-growth monetary policy stance supporting the 7% growth target and the 6.2% inflation target for the fiscal year 2016.”
Justifying its cautious stance, Governor Atiur Rahman said: “Vehicle is running comfortably. We do not want to gear up its speed suddenly for making room of instability. That’s why it is similar to the last one.”
Private sector credit growth is projected to grow at 14.3% for the next six months, down from the previous monetary policy.
Credit growth to the private sector stood at 13.6% by June, falling short of target of 15.5% set in the previous monetary policy.
BB governor said some quarters held the view that setting high targets for credit expansion was needed for stimulating higher rates of GDP growth.
“Pumping excessive liquidity in absence of progress in addressing infrastructural inadequacies and other well-known investment impediments will only stoke inflation and worsen social inequity by encouraging unproductive speculative pursuits.”
“We have, therefore, been taking care in adopting cautious, restrained monetary stance ensuring adequacy of credit growth but at the same time avoiding undue excessive expansion.
“This stance is serving our economy well in maintaining inflation moderation and stability on a sustained basis.”
If the last fiscal year’s 13.6% credit growth could endow the economy with 6.5% output growth, a provision of 15% private credit growth appears to be adequate to support 7% output growth for the current fiscal year, said the BB statement.
In extending loans to the productive and vulnerable sectors at lower interest rates, a fund for $500m
will be created to support medium and long-term projects, especially environmentally responsible investments at lower interest rates in the current fiscal year.
Of the fund, the World Bank has committed to contribute $300m as credit and BB will add another $200m which will be specifically for greening initiatives in the export oriented textiles, apparels, and leather sectors.
“Creation of this fund means to make more room for investment. We are discussing with the World Bank to increase the fund,” said Atiur. “So space has been kept more than what is needed to achieve 7% growth in the new monetary policy.”
Bangladesh Bank kept the benchmark repo rate at which it lends money to banks, unchanged at 7.5%, in the monetary policy for first half of the current fiscal year.
Against the backdrop of falling general inflation due to easing food prices and edging up nonfood and non-fuel core inflation, the statement said, “Policy interest rates (repo, reverse repo) will remain unchanged, but easing will be considered after point-to-point headline general inflation and core CPI inflation take a sustained declining trend.”
“In addition, the fall in interest rates is not significant enough to warrant a downshift of policy rates immediately. The changes are nevertheless not substantial enough to outweigh the concern about rising core inflation. Policy rates will, therefore, remain on the course as before.”
In February 2013, the central bank had cut repo rate by 50 basis points to 7.5% after three years. BB expects to keep inflation rate at a moderate level. For a developing economy like Bangladesh,
various empirical studies and the public perception define a range of 4-6% inflation as moderate.
“The upper limit of this range may move further up if the economy is accelerating at 7% or above. Then affording an inflation rate of 7% or 8% will be necessary to absorb the speeding up of employment, output, and wages,” the statement said.
“The government’s 6.2% inflation target for the FY16 implies that we need to go for further reduction by slightly pressing the brake on the price level.”
The central bank also sees a slowdown in the growth rate of foreign exchange reserves in the near future
because of imports’ outpacing exports by around 8.5 percentage points.
Reserve money is projected to grow at 16% and broad money (M2) at 15.6% which are adequate to support the growth and inflation targets. It has also taken the growth rates of both public and private credit into account.
Describing the widening current account deficit and its financing blessing to monetary policy, the statement said an augmenting current account deficit would turn out to a blessing in disguise for at least a year or two ahead once it came to the exchange rate and reserves.
The next current account deficit for the FY16 is projected to reach $3.55bn which will eventually reduce the overall balance to $1.13bn.
The central bank expects 14% growth in imports, 7.5% growth in exports, and 10%
growth in remittances for the fiscal year.
